Will Swedes profit from euro levels after announcing results?

Swedish banks will kick off the Q3 earnings season next week. Alex Sönnerberg, Nordic DCM Origination, Crédit Agricole CIB, considers the prospect of them emerging from blackouts with new euro benchmarks.

Swedbank reports results on Tuesday (22 October), followed by Nordea and Handelsbanken on Wednesday, SEB on Thursday, and Länsförsäkringar Bank on Friday.

Around this time last year, Handelsbanken was the only Swedish bank that had issued a benchmark covered bond in euros and we were arguing that we could see more supply from the Swedes before year-end due to a large movement in the EUR/SEK cross-currency basis swap curve that meant the euro market was less expensive than their domestic market at the time (see article online by clicking here).

In the end, we never saw any more supply from the Swedes in 2012 and had to wait until the first quarter of this year until SEB emerged with a Eu1bn seven year covered bond in February (Crédit Agricole CIB acted as joint lead manager). Swedbank, Handelsbanken and Länsförsäkringar followed with new benchmark transactions in March and April, but it has been quiet from the Swedes in euros ever since.

It’s therefore interesting that the Swedes find themselves in a similar situation now — a year later — as a result of another large movement in the EUR/SEK basis swap curve. In addition, the ongoing squeeze in core covered bonds means spreads of the Swedes’ outstanding euro benchmark covered bonds are trading at record lows.

As a result, the average all-in funding cost of issuing a five year euro covered bond is now less than what the Swedes can fund themselves at in their domestic Swedish kronor market, according to our calculations.

Fortunately for the Swedes, the euro primary market is evidently in good shape for banks in core jurisdictions, with the majority of recent benchmark covered bond transactions priced flat to issuers’ curves, at the tight end of official price guidance. Recent new issues have also performed well in the secondary market, trading at or tighter than re-offer spreads, and we’ve seen better buyers of Swedish covered bonds in the secondary market lately.

Similarly to last year, improved sentiment towards European issuers and a large volume of Yankee market supply in September and October is behind the tightening in the EUR/SEK basis as a result of the EUR/USD basis being bid up by issuers hedging their bond proceeds. With US politicians having kicked the can further down the road, the short term risk for the Swedes would be that US-based issuers start taking advantage of the favourable funding costs in euros (such as a long seven year senior unsecured issue for JP Morgan yesterday (Wednesday)) and EUR/USD becoming better offered.

Of course, whether or not we’ll see any Swedish banks in the euro market with covered bond issues again before year-end will not only depend on the current all-in funding cost, but other factors as well. Nevertheless, there is a chance that we could see one or more opportunistic issues from the Swedes next week.